Corporate Buybacks vs. Capital Spending

There has been a lot of chatter this year about corporations buying back their own stock rather than investing in their businesses. On Tuesday, Ed Yardeni debunks this myth with facts.

“True Story III: Capital Spending at Record High. Another widely held view is that corporations aren’t spending enough on plant and equipment because they’re spending too much on buying back their shares with too much money borrowed in the bond market. Au contraire: The GDP data show that nominal capital spending rose to a record high of $2.8 trillion (saar) during Q3-2018. Over the past year through Q2-2018, S&P 500 buybacks totaled $646 billion. That’s a lot, but it wasn’t enough to slow capital spending. Consider the following:

(1) Buybacks and dividends. It’s true that the sum of buybacks and dividends paid by S&P 500 companies has equaled close to 100% of their operating income over the past few years. Specifically, buybacks plus dividends equaled $1.08 trillion over the past year through Q2, while operating income totaled $1.20 trillion. “What a waste of money that could have been used to expand capacity and boost labor compensation,” say progressive do-gooders.

(2) Capital spending and cash flow. So how did capital spending rise to a record high if most of corporate profits were used for buybacks and dividends? Corporate Accounting 101 teaches that corporate cash flow is the driver of corporate income statements. Data collected by the Fed for nonfinancial corporations show that internal cash flow fully covered gross fixed investment—which rose to a record $2.0 trillion—over the past year through Q3. The overwhelming majority of cash flow is attributable to the capital consumption allowance, i.e., depreciation, which in effect serves as a huge tax shelter for corporate income.

(3) Corporate bond borrowing. It’s true that nonfinancial corporate bond debt rose to a record $5.5 trillion during Q3. However, the y/y change in this series shows that the pace of net borrowing has fallen from a record $462 billion during Q3-2015 to $125 billion during Q3. Gross issuance typically well exceeds net issuance, as it has during the current expansion, suggesting that lots of bonds have been refinanced at relatively low interest rates.”

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